Fears of FMCG companies are finally coming true

Research firm Nielsen IQ has reported in its latest quarterly update that volumes shrank 4.1% in the March quarter compared to last year, as consumers across all zones and town classes cut back spending because of higher prices. It has reported that rural consumers, in particular, are hurting amid economic difficulties, and reduced spending by 5.3%, the sharpest consumption slowdown in three quarters.

If the overall FMCG market managed to grow 6%, it was only because of the double-digit price growth. Volumes contracted across categories, but significantly more in non-food than food. Consumers switched to smaller packs or stopped buying certain products altogether. Rural markets for packaged goods slowed down for the third successive quarter. Prices of everything from soaps to fuel have been rising. Rural demand has remained volatile since the September quarter.

Nielsen IQ has also reported a 5.3% increase in exits by small manufacturers during the quarter, who found it difficult to pass on the significantly higher input costs to consumers and perished consequently.

Inflation has been whipsawing business by exerting pressures on both demand and supply sides. The cost outlook for key commodities—edible oils, coffee, wheat, fuel—remains firm. Costs of packaging materials are increasing continuously amid supply constraints lingering from the pandemic lockdowns, and fuel and transportation heads have become new pressure points.

The Nielsen IQ figures are the latest, undeniable evidence for India’s monetary-fiscal policy mix missing out completely on the signals and feedback from the real economy about the impact of the policy choices being made. As a result, there’s been a failure to correct for policy errors.

FMCG companies operate close to consumers, and had been warning for months that high and continuously rising inflation was turning out to be demand-dampening and growth-retarding. But the guardians of monetary policy in Mumbai and of fiscal spending in Delhi were not paying sufficient attention. Macroeconomic policy managers remained complacent on inflation for too long, saying they were focused on supporting growth. The risk is that they may have, in the process, let inflation spiral out of control, which could end up slowing growth and weakening the recovery. The response from the fiscal side in providing relief to household budgets for protecting their purchasing power has also been too late, too little.

Nitin Paranjpe, chairman of Hindustan Unilever (HUL), told investors in the company’s annual report for 2021-22 that high inflation was leading to a marked slowdown in growth rates. This is not the first time in the last many months that the FMCG giant flagged concerns publicly about how prices were getting out of control, shrinking people’s purchasing power and, therefore, acting as a spoiler for business.

Packaged-goods companies Dabur India and Marico reported weak rural demand in the March quarter and found consumers were downgrading to cheaper packs and brands for toothpaste, hair oil and shampoos. Marico’s managing director and CEO Saugata Gupta said that the stress factor in the rural markets is “high" and that the company is now hoping for a good harvest season, a normal monsoon and higher government spending, as it waits for rural demand recover. Both companies, however, said that they were not expecting inflationary pressures to ease in a hurry and warned of pressure on profit margins.

Food and beverages major Nestle India has said that surging costs of raw materials hit its profitability during the January-March quarter. The company reported growth in its topline, led by better domestic sales. Its gross margin, however, fell and earnings before interest, tax, depreciation and amortization (EBITDA) margin shrank. Suresh Narayanan, chairman and managing director, Nestle India ascribed the margin squeeze to costs of key raw and packaging materials skyrocketing to 10-year highs, and cautioned that high inflation was likely to be a key factor in the short to medium term. Market analysts are predicting that the worst may not be over yet for Nestle, which too has been pointing out for months that high inflation is squeezing business.

Inflationary expectations have clearly surged, defying months of assurances from the Reserve Bank of India that high prices were going to be a “transitory" phenomenon and inflation will fade away on its own without requiring monetary policy to clamp down on it, leaving the central bank the putative luxury of focusing on supporting growth. After being late to shift to an inflation-controlling policy stance following its failure to assess the impact of high and rising prices on consumption spending, the central bank now faces the challenge in convincing markets that it can tame runaway price growth any time soon.

True, India remains one of the fastest-growing FMCG markets globally, as more Indians enter the middle class and its urban population grows, changing consumption preferences and driving up consumption.

Also true, economic difficulties such as high inflation, and the impact of the pandemic on household incomes and consumption, hand an advantage to established organized sector players, mostly at the cost of smaller or unorganized enterprises that can no longer preserve their low-price advantage. When inflation is low and stable, smaller players, operating commonly in just one region or district, hold significant market share, often due to lower pricing, in segments such as tea, edible oil and hair oil, but find it difficult to survive high inflation, as the Neilsen report has showed.

FMCG leaders like HUL, Britannia, Marico, Dabur and Adani Wilmar have reported market shares expanding at a hectic pace during 2021-22, attributing the gains to inflationary pressures on smaller players with low withstanding ability, as Britannia managing director Varun Berry told investors while talking about the company’s decade-high share in the biscuits segment.

HUL reported its highest market share gains in more than a decade in urban and rural, in value and volume, across the divisions — beauty and personal care, foods and refreshments, and home care, in large packs, mid-packs and small packs.

But a narrow focus on the potential for consumption growth and the market rejig in which larger firms are eating away smaller businesses masks the overall picture. Fact is, India's villages, which make for a little over a third of the total FMCG sales in the country, have reported sales growth declining since September 2020, chiefly on account of high inflation. Dabur India, its chief executive Mohit Malhotra has said, struggled with a liquidity crunch besides the lower demand in rural markets in the March quarter. The maker of Real drinks and Vatika shampoo depends on non-urban consumers for nearly half of its domestic business.